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OECD Economic Surveys : Germany 1968. PDF

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/> I. 2. b. 7. I ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ^ORGANISATION DE COOPERATION ET DE OEVELOPPEMENT ECONOMIQOES I BASIC STATISTICS OF GERMANY (F.R.) THE LAND Area, 1966 (thousand km') 249 Major cities, June 1966 Agricultural area, 1966 (thousand km1) 140 Million Forests, 1966 (thousand km*) 72 inhabitants Berlin (West) 2.2 Hamburg 1.9 Munich 1.2 Cologne 0.9 Essen 0.7 Dusseldorf 0.7 Frankfort 0.7 Dortmund 0.7 THE PEOPLE Population 1966 (thousand) 59638 Net immigration (annual average No. ofinhabitantsperkm* 240 1964-1966) 251000 Net natural increase in population Labour force, total 1966 27082000 (annual average 1964-1966) 384000 Labour force in industry, 1966 13103000 per 1000 inhabitants 6.5 PRODUCTION GNP 1966 (billions ofDM) 480.7 OriginofGDP, 1966(percent): GNP per head 1966 (US S) 2015 Agriculture, forestry, fishery 4 Cross fixed investment (average 1964 Industry (incl. construction) 52 1966): Services 44 per cent ofGNP 26 Home food production as a percentage per head (US J) 495 of total food availability (agricultural year 1965-1966) 59 THE GOVERNMENT Public consumption 1966 (per cent of Composition ofFederal Parliament GNP) 15.7 Christian Democrats 245 seats Generalgovernmentcurrentrevenue1966 Social Democrats 202 (per cent ofGNP) 37 Free Democrats 49 Publicdebt,1966(ratiotogeneralgovern¬ Last election: 19th Septembre 1965. ment current revenue) 53 Next election: 1969. LIVING STANDARDS Calories per head, perday 1965-1966 2911 No.ofradiosetsend1966(per1000inha¬ Average gross hourly earnings ofmale bitants) 306 industrial workers, 1967 (DM) 4.99 No.oftelevisionactsend 1966(per 1000 No. ofpassengercars inuse, mid-1966 inhabitants) 213 (per 1000 inhabitants) 161 Public current expenditure on education No. oftelephones end 1965 (per 1000 per head, 1966(US S) 31 inhabitants) 148 FOREIGN TRADE Exports: Imports: Exportsofgoodsandservice,aspercent Importsofgoodsandservicesaspercent ofGNP(average 1964-1966) 21 of GNP (average 1964-1966) 20 Mainexports, 1967(percentoftotalmer¬ Mainimports,1967(percentoftotalmer¬ chandise exports): chandise imports): Productsofagriculture,forestryandfish¬ Products of agriculture, forestry and ing 1 fishing 19 Basicmaterialsandsemi-finishedgoods 32 Basic materials and semi-finished goods 39 Manufactured foods and tobacco 2 Manufactured foods and tobacco 9 Other consumer manufactures 10 Other consumer manufactures 12 Investment goods 53 Investment goods 17 Other exports 2 Other imports 5 Total 1ÔÔ Total 100 THE CURRENCY Monetary unit: Deutsche Mark. CurrencyunitsperUSdollar 4.00 Note.FiguresincludetheSaarandWestBerlin. ECONOMIC SURVEYS BY THE OECD A R C H R ÉF É R " ' : DOC P;;:L: RETOUR BUT GERMANY ORGANISATION FOR ECONOMIC CO-OPBRATTON AND DEVELOPMENT The Organisationfor Economic Co-operation andDevel¬ opment was set up under a Convention signed in Paris on 14th December 1960 by the Member countries ofthe Organ¬ isationfor European Economic Co-operation and by Canada and the United States. This Convention provides that the OECD shallpromotepolicies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintainingfinancial stabi¬ lity, and thus to contribute to the development ofthe world economy; to contribute tosoundeconomic expansion in Member as well as non-member countries in the process of economic development to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with internationalobligations. The legalpersonality possessed by the Organisationfor European Economic Co-operation continues in the OECD, which came into being on 30th September 1961. The members ofOECD are: Austria, Belgium, Canada, Denmark, France, the Federal Republic ofGermany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. TheSocialist FederalRepublicof Yugoslaviais associated in certain work of the OECD,particularly that of the Eco¬ nomic and Development Review Committee. This document was approved by the Economic and Development Review Committee in April 1968. CONTENTS Introduction 5 I Policy of Demand Restraint and Recession 5 Monetary Policy 6 Budget Policy 8 II Policy of Demand Reflation and Recovery 10 Monetary Policy 11 Budget Policy 13 Recent Trends and Prospects 16 HT The Balance of Payments 25 Recent Trends 25 Outlook for 1968 27 Prospects and Policy Conclusions 29 Statistical Annex 33 TABLES (a) In text 1 New Bond Market Issues 13 2 The Federal Budget on a National Account Basis 15 3 Government Gross Fixed Investment 16 4 Capacity Utilisation, Productivity, Labour Costs in Manufacturing 19 5 Employment and Labour Market 20 6 Prices 20 7 The Capacity Slack 24 8 The Balance of Payment 26 (b) Statistical annex A Gross National Product 35 B Distribution of National Income 35 C Employment and Labour Market 36 D Industrial Production, New Orders and Deliveries 37 E Wages and Prices 38 F The Federal Budget 39 G Money and Banking 40 H Merchandise Trade by Area 41 I Merchandise Trade by Commodity Groups 42 J The Balance of Payments 43 INTRODUCTION Therecessionwhich had developedinthelatterpart of 1966 as aresult of policies designed to check the previous overheating, had been largely arrested by mid-1967. By the autumn the corrective action which the authorities had, progressively, been applying led to a revival of domestic demand. Output has been rising since then andthe employment situation has improved, highly stable cost/price conditions have been maintained but small inroads have been made, as yet, into the very large surplus on the current balance of payments. The question is whether the recovery will prove strong enough significantly to reduce under-utilization of capa¬ cityinthe currentyear, orwhetheritwill lose strength as the directimpact of official stimulus diminishes. The performance of economic policy in the period immediately pre¬ ceding the downturn ofthe economy, and in the early phase ofthe reces¬ sion, can now be assessed in the light of fuller information. In view of its relevance to problems ofgeneral and continuing interest in the context ofthe adjustmentprocess, this is discussed in Part I ofthe present Survey. Part II considers the subsequent policy ofdemand reflation and the pros¬ pects for domestic demand and activity in the current year. Balance of payments developments and prospects are reviewed in Part III. I POLICY OF DEMAND RESTRAINT AND RECESSION There were two main reasons why the policies to restrain the course of demand in the years 1965-67 brought the economy into recession. First, the authorities failed to arrive at a suitable policy mix. During most of the period, monetary policy had to carry the whole burden of demand restraint and, to this end, was applied with a severity that led to a substantial fall in investment. Second, the problem of timing often difficult to judge in such cases was misjudged in the latter phase of the experience. Fiscal policy became restrictive at a time when monetary policy had already led to pronounced recessionary tendencies, and the general restriction of demand was reversed too late. With the inevitable OECD Economic Surveys time-lag between policy action and impact this meant that the recessionary tendency persisted for roughly one year. Thedownturnoftheeconomywasledbybusinessinvestment. Machi¬ nery and equipment expenditure lost strength during 1965, started falling in early 1966 and, by the first half of 1967, was going down at an annual rate of 20 per cent. Stock-building weakened for more than a year and then gave way to net destocking in the course ofthe second half of 1966. Construction activity, favoured by good weather in the first half of 1966, fell offin the second half ofthe year and declined steeply during the fol¬ lowing half year. The foreign balance on goods and services improved strongly on a seasonally adjusted basis from late 1965 onwards and partly concealed the effect ofthe restrictive policies on output and activity. But by the autumn of 1966, with government consumption also declining, domestic demand as a whole was falling and the foreign balance was incapable of preventing a decline in output and activity. The foreign labour outflow started, unemployment and short-time working began to spread, and the wage rise slowed down under the influence ofthe weak¬ ening labour market. Although household savings bore part of the impact, private consumption stopped rising in the second half of 1966. Monetary policy The restrictive monetary policy dates back to the summer of 19641 when imbalances appeared to be developing. Prices began to rise faster than previously, and the current account ofthe balance ofpayments turn¬ ed from surplus to deficit. Further tightening was effected in 1965 when, partly as a result ofexpansive fiscal policy, new inflationary developments were to be feared. This was followed up by important new measures of monetary restriction in the early summer of 1966 and active relaxation policy was postponed until the turn of the year. Monetary policy turned out afar more effective instrument ofdemand restraint than in earlier post-war periods primarily because it coincided with rising balance of payments deficits and because special measures were adopted to ward off capital inflows from abroad. The precipitous decline in bank liquidity, which started in early 1964 and persisted until mid-1966, produced a degree ofliquidity squeeze unkonwn since the early 'fifties.2 Credit costs in the capital market were strongly affected by 1 The measures taken in recent years are described in earlier Surveys. 2 DM 10i billion of bank liquidity was drained off during this period. The banks' position changed from one ofexcess net reserves corresponding to 6.5 per cent of deposits in January 1964 to one of borrowed net reserves equal to 0.7 per cent of depositsinJune 1966. (Netreserves = moneymarketinvestmentsathomeandabroad less indebtedness to the Central Bank.) Germany large net sales offoreign-held bonds in response to the announcement in early 1964 of the withholding tax on non-residents, by the withdrawal of banks from the securities markets and by a confidence crisis on the part of the general public which, by the summer of 1966, brought bond yields to apost-war peak and virtually paralysed newissue activity. Rates on mortgages and non-negotiable promissory notes followed bond yields closely and money market rates rose steeply. The cost of short- and medium-term bank credit also seems to have risen substantially.1 Mone¬ tary policy had strong effects on the supply, as well as the price, of bank credit. The expansion ofbank credit started to slow down in the second half of 1965. From mid-1966 onwards, the commercial banks, the most severely affected by the liquidity drain, substantially cut back their short- and medium-term lending to enterprises.* Another reason accounting for the strong impact monetary policy had during this period lies in the fact that, for a number ofyears, impor¬ tant sectors of the economy had become increasingly dependent on bor¬ rowing. In the enterprise sector, self-financing had fallen from one half of investment in the early 'fifties to only, a fifth by 1965.3 A similar development took place in respect of the communes, which account for two thirds of total public investment. Moreover, the investment boom which faced the monetary authorities seems to have been considerably less vigorous than those of earlier post-war years. In manufacturing, there was no strong incentive to extend capacity, for the business situation had not raised capacity utili¬ zation rates significantly and no big order backlogs had accumulated. This held true also for the building industry which, indeed, hardly shared at all in the upturn. The underlying trend in dwelling construction had weakened with the progressive disappearance of the housing shortage and less generous government aid. Under these conditions monetary restraint is likely to influence invest¬ ment activity relatively strongly. Its effects in Germany were intensified in May 1966 when, at a time when investment demand seems already to 1 Until April 1967 such rates were subject to aceiling tied to Bank rate. But it was possible to raise them more sharply than Bank rate increases permitted because, in many cases, short- and medium-term credits had previously been supplied at prefe¬ rential rates below the ceiling. 2 The fact that lending by other German banks and foreign banks continued to grow in the autumn suggests that the change reflected commercial bank lending policy rather than falling credit demand. 3 Undistributed profits, net ofdepreciation at replacement cost and taxes, in per cent of net investment in physical assets. The figures relate to the enterprise sector includingthe Federalrailway and postal services which haverun large deficitsinrecent years. OECD Economic Surveys have been falling, bank rate was raised by one full percentage point with accompanying cuts of rediscount lines. The increase of Bank rate was considered partly as an adjustment of the rate to ruling market condi¬ tions. A second objective of the May measures was to check invest¬ ment demand which was judged too high. The basis for the apparently widespread expectation of a reversal of restrictive monetary policy disap¬ peared and the commercial banks reduced their lending from the summer on. These banks were at that time heavily dependent on the Central Bank. Budget policy The policy mix deteriorated in the election year 1965. At a time when monetary policy was seeking to restrain high and rising demand, taxes were cut and the increase ofFederal spending was stepped up. The expansive impact of the changes in Federal revenue and expenditure in that year can be roughly estimated at 0.5 per cent of GNP, as against a contractive effect corresponding to 0.3 per cent of GNP in the preceding year.1 In 1966, on the other hand, there was a relative tightening of budget policy when monetary policy had already had an important im¬ pact on home demand. The Federal budget stimulus was reduced to 0.3 per cent of GNP a calendar year estimate which conceals a growing degree of budget restraint as the year went on. There was more than a 10 per cent reduction of new Federal orders for civil engineering works in the second half of 1966 as compared with a year earlier, and a 20 per cent fall in new buildingpermits for othertypes ofpublic building. Fede¬ ral orders for civil engineering fell sharply again in the early months of 1967 in response to new restrictive spending directives laid down by the Federal government in the midst of the recession.2 They were accom- 1 Thebudgetimpacthasbeenestimatedasfollows. TotheincreaseofrealFede¬ raldomesticexpenditureongoodsandservicesandtransferstoothergovernmentautho¬ rities has been added theeffect ofthebudgetchanges on thepurchasingpowerbalance ofthe household sector. This effect was estimated by applying a multiplier of 1.27 to thesum ofthechangeinreal Federal domesticpurchasesofgoods andservicesplusthe change in net deflated Federal transfers to households minus the change in deflated taxes received from households. The multiplier used was derived from the marginal consumption and the import ratios of households prevailing in the period 1955-1965. Forfullerdiscussionofthemethodsusedseestudy byProfessorB. Hansenaccompany¬ ing the forthcoming report on fiscal policy by the OECD Group ofFiscal Experts. 2 These stipulated that spending by the Federal departments should be restricted totheamountsappropriatedinthe 1966budget,orlesswherethe 1967budgetproposal provided for lower amounts. Furthermore, certain types of spending were subjected to a second ceiling (corresponding to 75 percent ofthe spending estimates provided in the 1967 budgetproposal) andpaymentsunderanyitem inanymonthwerenotallowed to exceed one-twelfth of the annual total foressen for the item. Except for above- ground buildingfinanced out oftheordinarybudget, theplacing ofnewbuilding orders requiredpriorconsentoftheMinisterofFinanceandnocontractsinvolvingexpenditure obligations in future budget years could be entered into without special permission.

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